Rupee Set to Test RBI Support at 95.80 as Oil Rally, US Yields Weigh

The rupee is set to come under pressure at Tuesday's open, with traders expecting it to weaken towards 95.80 against the US dollar from its Friday close of 95.55. Indian financial markets were closed on Monday for a public holiday.

The 95.80 level has emerged as a key near-term support, with the Reserve Bank of India repeatedly intervening to defend the currency around that mark. The central bank was seen selling dollars near 95.80 on Friday, and similar intervention was reported in mid-August when it kept the rupee from slipping past that level.

A currency trader at a bank said a break below 95.80 would weaken the rupee's near-term technical setup and could trigger fresh dollar buying, with 96 emerging as the next psychological marker. A sustained breach of 96 could then expose the currency to a deeper leg of depreciation, the trader added.

The pressure stems largely from a relentless oil rally. A stalemate between the United States and Iran has kept the Strait of Hormuz largely shut, while fresh attacks by Iran-backed Houthi forces in Yemen on Saudi Arabia have led the kingdom to block a pipeline that allows it to bypass the strait.

Monday's Houthi attacks and stalled Gulf-Iran talks have heightened fears of a wider conflict and further supply disruptions. Brent crude rose more than 1% in Asian trading to $107.20 a barrel, extending its rally this month to over 18%, after hitting near $110 on Monday.

The oil surge is fanning inflation concerns and pushing US Treasury yields higher, with the 10-year yield touching 5% for the first time in nearly three years. The jump in crude has driven a repricing of the rates outlook, with markets now assigning near certainty to a Federal Reserve rate hike on Wednesday.